• US banks call for easing Basel III: US banks are making a last minute push to ease global liquidity requirements as they would need to come up with an additional $800 billion under proposed standards. The banks have already increased their liquid holdings by $700 billion, and claim that the US market is ‘significantly more liquid compared to 2 years ago’.

· RBI likely to hold IR: While major indicators show that price pressures might be easing, it is not enough for the Reserve Bank of India to cut repo rates atleast until January. The WPI-based inflation eased to its lowest level in 10 months. In order to fight tight liquidity, RBI has cut the CRR, which it might cut again by 25 bps to 4%. The RBI is also set to review the monetary policy this week.

Companies

• AIG to sell AIA holding: AIG has begun to sell its remaining stake of 13.7% in AIA. The exit from the Hong-Kong company is expected to raise $6.4 billion. AIG is offering a discount of 3.2-6.3% in comparison to the closing stock price of AIA on Friday. AIG has been selling non-core assets in order to raise money as it moves to repay the US govt. for bailing it out in 2008.

Growth in production to be reinforced through and resulting in inflation moderation.

Anchoring medium-term inflation.

Macroeconomic Situation: Growth has been decelerating for 4 continuous quarters, from 9.2% YoY in Q4 2010-11 to 5.3% YoY in Q4 2011-12. Global and domestic risks have been accentuated by halted investment demand, reduction in consumption spending and erosion in export competitiveness. The headline WPI was given undesired momentum by the rise in fuel prices, and consequently power generation. This was not helped by rising food-prices due to a poor and delayed monsoon this year. The headline WPI remains sticky above 7.5% YoY. Consumer Price inflation (CPI) remained high, although CPI excluding food and fuel items dropped down from its double digits level. WPI inflation projections have been revised to 7.5% for June 2013 from 7% owing to persistent supply constraints, and price pressures. Also, correction of under-pricing of certain products will reveal suppressed inflation, which might result in increased overall inflation.

Monetary and Liquidity Situation: M3 has trailed below indicative trajectories of the RBI, indicated, and then re-iterated in April and July policies. Deposit growth has also decelerated with moderation in interest rates. Credit growth has also ebbed due to the lack of investment demand, especially in the infrastructural industry. The trajectories of the monetary aggregates for 2012-13 are projected at 14% for M3 and 15% for food growth.

Risk Factors:

Global macroeconomic conditions comprising low confidence in exports, slow business conditions and hesitation to invest in Indian public debt.

High prices of global commodities.

Unpredictable behaviour of food inflation.

Persistent increase in rural and urban wages despite the lack of production growth.

The size of the twin deficits: current account deficit and fiscal deficit.

While money is being injected into the system, this must be accompanied by growth in production and supply. Excess liquidity could hence, aggravate inflation. The core inflation remains high, due to supply constraints also.

• Japan sinks into fresh recession: Japan slipped into a technical recession in 6 months to September making the need for financial stimulus urgent. GDP data on Monday showed that the output slipped by 0.9% in Q2 of this FY.

China’s trade suffers: Amid global fears, China’s trade has been suffering. November figures show a contraction in both exports and imports. In October this year, exports had shot up 11.4% YoY, but this figure has dropped to 2.9% in November. China’s trade surplus at $19.6 billion is its lowest in five months.

Companies

• US and UK to unveil failing bank plans: US and the UK will, for the first time, unveil cross-border regulations for failing global banks, outlining proposals to force shareholders and creditors to bear losses and to ensure that sufficient capital exists with the banks to protect the taxpayers.

News from India

Bank credit to be better in FY14: Credit growth is expected to be better in the next FY. With the economic growth also expected to pick up for FY14, it is being estimated the bank credit growth might touch 16-17%. Having said that, this development should mainly arise from growth prospects, as there won’t be any significant cut in interest rates.

Basel bonds flop in India: A lack of interest from investors is threatening the efforts of Indian banks to raise additional capital in order to comply with the tougher Basel III rules. The first round of capital raising flopped with many investors completely unaware of Basel bonds. With this, the banks might need to tighten their loan books, to have enough liquid capital.

Growth rate in the real GDP has broadly been in line with the expectations. The expected growth was of the order of 5.5%, compared to which the GDP grew 5.28% in Q2 this year. The growth rates have been slow mainly due to the slowdown in the industry. Among major components, services grew over 7%, while industry grew 2.8%, and agriculture only 1.2%. However, agriculture was affected by poor rains, and accounted for less than 12% of the GDP. The construction sector added 6.7%, compared to over 10% seen in Q1.

Inflation: Inflation for industrial workers rose to 9.6%, as measured by the CPI. This figure was 9.4% last October, and 9.1% this September. Compared to October 2011, inflation in food group has risen to 9.9% from 8.7%. This value has fallen from September 2012, when it was almost 11%, mainly due to poor rains this year.

Fiscal Deficit: Fiscal deficit for the April-October phase is at 71.6% of the budget estimates. It currently sits at Rs. 3.7 trillion. The revenue deficit stands at Rs. 2.9 trillion. Central govt’s total receipts (June-October) are at Rs. 4.1 trillion which account for nearly 42% of the budget for 2012-13. This can be broken down into tax and non-tax revenue, which were Rs. 3.3 trillion, and Rs. 704 billion, respectively. The govt’s total expenditure stands at about Rs. 7.8 trillion. The biggest drop in financing sources was external financing. This accounted for 40% last year, but at Rs. 1.4 billion, this accounted for a mere 1% this year. As a percentage of GDP, fiscal deficit stands at 6.41% (end of September 2012)

Credit Growth: Credit growth has slowed down mainly across industrial and service sectors. Gross bank credit growth slowed to 15.9% in October, 2012, compared to 18.7% last year. The food credit growth also slowed to 37% compared to 48% last year.

Power Generation: Power generation has grown 5.9% in October this year. Thermal power generation leads with an 11.7% rise. However, hydel power generation fell below targets, while nuclear power generation rose a mere 1.6%.

WPI: Wholesale Price Index is up 0.18% in October 2012 against September 2012. The average increase stands at 0.54%, since its launch in 2004. Primary commodities’ WPI declined 0.23%, while primary non-food articles WPI is down 2.3%. Diesel index shot up 5.2%, while mineral oils are up 1.27%.

Forex Reserves: Forex reserves on 23 November, 2012, stand at $295 billion. These are $9.4 billion lower compared to last year. Currency assets are at $260 billion and gold reserves are at $28.2 billion.

Capital Formation: Gross fixed capital formation ratio has risen steadily over the last 3 quarters. End of Sept. 2012, this ratio was 33.8%. This ratio was 30% in Dec. 2011, its lowest level in 6 years, but this has steadily made up ground since then. Capital goods fail to explain this rise in the investment ratio, as their production and import level has fallen; hence, this might be an indicator that capital formation is back.

Manufacturing growth has accelerated to a 5-month high in November. HSBC purchasing manager’s index (PMI) has risen to 53.7 from 52.9 in October.

Foreign Institutional Investors’ limit in domestic debt has been raised by $10 billion.

RBI has refused to cut key policy rate, which is at 8%; however, they have reduced the cash reserve ratio requirement to 4.25%, which has freed up Rs. 17,500 crore of additional funds. There is a hint that there might be easing of rates policy next year.

1. Real GDP: The increase in the real GDP in Q3 reflects positive contributions from personal consumption expenditures (PCE), federal government spending, and residential fixed investment that were partly offset by negative contributions from exports, nonresidential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

2. Current Account Deficit: The U.S. current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers—decreased to $117.4 billion (preliminary) in the second quarter from $133.6 billion (revised) in the first quarter. The decrease in the current-account deficit was accounted for by a decrease in the deficit on goods and an increase in the surplus on income. The deficit on goods and services decreased to $139.3 billion in the second quarter from $148.4 billion in the first. The deficit on goods decreased to $185.8 billion in the second quarter from $194.3 billion in the first.

3. Operation Twist: While an aggressive economic easing policy has not been opted for, operation Twist has been extended for now. The latest round of QE (started Sept. 2012) will aim to provide nearly $40 billion of MBS per month until labour recovery is complete. This will put a downward pressure on long-term interest rates. The medium term inflation is expected to run around the target 2% mark. The US growth for this year is expected to be between 1.9 and 2.4%.

4. Interest Rates and Unemployment: It is expected that very low interest rates will persist until the end of 2014. Unemployment rate may range from 8 to 8.2%, rising from 7.8 to 8%. Growth hopes have, however, been lifted by positive housing data. Housing prices have risen for the 6th consecutive month now; the housing index rose by 0.3%, and is up 3% compared to last year. On the back of economic announcements, Treasury yields rose, while 30-year yields remained unchanged.

6. Private wage and salary disbursements: These have increased $19.5 billion in September, compared with an increase of $4.1 billion in August. Goods-producing industries’ payrolls increased $2.9 billion, in contrast to a decrease of $7.2 billion; manufacturing payrolls increased $0.5 billion, in contrast to a decrease of $6.3 billion. Services-producing industries’ payrolls increased $16.6 billion, compared with an increase of $11.3 billion. Government wage and salary disbursements increased $1.4 billion, compared with an increase of $2.8 billion.

7. Farm and Non-farm Payrolls: Farm proprietors’ income increased $3.9 billion in September, the same increase as in August. Nonfarm proprietors’ income increased $9.4 billion in September, compared with an increase of $4.8 billion in August.

GDP by Industry

Retail trade and durable goods manufacturing were the leading contributors to the deceleration in U.S. economic growth in 2011, according to revised statistics on the breakout of real gross domestic product (GDP) by industry from the Bureau of Economic Analysis. Real GDP growth slowed in 2011, increasing 1.8 percent after increasing 2.4 percent in 2010. The revised statistics do not change the general picture of the economy: 12 of 22 industry groups contributed to the slowdown in real GDP.

Obama is set to continue with some of his economic policies from last tenure. The target for the Fiscal deficit in 2013 is 4% of GDP, compared to 7.3% in 2012. This will be targeted through a ‘fiscal cliff’ which involves raising taxes substantially for the richer sections. With only 30% of fiscal cliff expected to expire in 2013, US growth is predicted at 2% for 2013. The expected affect of this fiscal cliff on India’s GDP is seen to be in the proximity of -0.6%. Global trade volumes are expected to decline 1.5%.

• EU may pursue Japan trade deal: EU will launch trade negotiations with Japan on a bilateral agreement. A successful deal would possibly add 420000 new jobs, majorly in Pharmaceuticals, business services, and F&B.

India’s Real estate sees drop: Indian real estate market has seen a major drop in foreign investments coming in. Compared to the investments of close to $20 billion in 2006-09, only $2-3 billion has seen an exit.

Companies

• India’s domestic air travel market worst performing: According to IATA, India’s domestic market is the worst performing aviation market in the world. The 12.4% plunge seen in October 2012, is the highest in the world. This is majorly being blamed on the high operating costs for the carriers, with a distinct lack on the govt’s part to rationalise jet fuel prices.

• UK banks face shortfall: In the light of the fact that the Bank of England requires UK banks to meet its valuation policies, UK banks will need to raise £20-50 billion to meet requirement or dramatically restructure their businesses.

• Brazil to grow 4%: According to Mantega, Brazil’s economy is expected to have grown 4% in Q3, and this growth is likely to carry on into Q4. The Brazilian central bank has kept lending rates unchanged for the first time in over a year. Brazil has seen only marginal growth in the previous 4 quarters.

RBI may buy back bonds: In light of the cash shortage in the Indian system, the central bank has said that it may buy back bonds from investors to ease the situation a bit.

Companies

• SAC face insider trading charges: SAC Capital is likely to face civil fraud charges in a case of insider trading. SAC is one of the most successful hedge-funds of all time, and the charges come as a shock. SAC is confident of being exonerated and are ‘cooperating’ with the inquiry.

• BP faces sanction: Britsh Petroleum is facing a temporary ban on US govt. contracts after its failings in the deepwater horizon disaster, which killed 11 people and created the largest oil spill of all time.